Pension schemes closing to existing members, research shows

One in six defined benefit pension schemes has been closed to existing
members, research from the Association of Consulting Actuaries shows.

8:00AM BST 31 Aug 2009

Around 87 per cent of defined benefit pension schemes, which include final salary pensions, are now closed to new members and 18 per cent of these are also closed to future accruals by existing ones, according to the ACA.

The group warned that the number of schemes which are closed altogether looks set to rise, with 39 per cent of employers saying they are considering changing the way benefits are built up in the scheme.

Around 35 per cent of these firms are considering switching to a career average scheme, under which pensions are based on an employee's average pay throughout their career, while 22 per cent may move to a defined contribution scheme, under which workers shoulder all the risk of investment volatility and increased life expectancy.

Three-quarters of companies called for the Government to make it easier for them to offer so-called middle way pensions, which enable companies to reduce pension costs, such as by not having to increase benefits in line with inflation.

Nearly eight out of 10 of the 309 firms questioned said current legislation did not allow them to easily share investment, inflation and longevity risks with employees.

Companies and employees now contribute an average of 29.5 per cent of a workers' pay into defined benefit schemes, nearly double the 15.8 per cent they paid in 2002, as these pensions have become increasingly expensive to offer.

But just 11 per cent of workers' pay is paid into defined contribution schemes, only marginally up on the levels seen in 2002.

Keith Barton, ACA chairman, said: ''This latest survey confirms all our worst fears about the loss of quality pension schemes and how this is now moving on to a phase where future benefits for existing members are likely to be pinned back as employers struggle to hold down costs within existing legislation.

''It is very clear from the survey that employers do not think employees want to take on the risks inherent with defined contribution.

''If we are to preserve as much private sector defined benefit provision as possible then the Government must act during 2010 to free up pension designs, so employers can better control defined benefit costs whilst continuing to provide a more stable pension outcome than is possible with defined contribution.''